During Q3 of 2023, businesses in the United States made approximately $3.3 trillion, according to Statista. This is right behind the third quarter of 2022, when corporations in America made even more money. These figures are the net income of the respective periods, according to the National Income and Product Accounts (NIPA).
With profits reaching all-time highs since Q3 of 2012, understanding how businesses can analyze their profitability ratios through the Operating Return on Assets (OROA) ratio is another helpful tool for number crunchers.
Defining OROA
This calculation helps business owners and analysts determine how well a business is run. It shows the percentage, per dollar, that a business makes in operating income relative to assets involved in day-to-day operations. Unlike the regular return-on-assets (ROA) calculation, the Operating Return on Assets ratio takes a more selective consideration of assets. The primary consideration for the assets in OROA’s calculation is to only consider assets employed in a business’ traditional operations.
The calculation is as follows:
OROA = Earnings Before Interest and Taxes (EBIT) / Average Total Assets
Another way to look at EBIT for the calculation is to look at the Income Statement’s Operating Income. For the average total assets, it’s taking a look at the business’ Balance Sheet and determining the two most recent yearly Total Assets for the company, that are used in its normal business activities.
Putting the OROA into practice, it’s calculated as follows:
OROA = $85,000 (Operating Income) / ($425,000 + $450,000) (Total Assets) / 2 =
= $85,000 / 437,500
= 0.1942 or 19.42 percent
This means that for every dollar of operating assets, the company has produced $0.1942 in operating income.
There are two important distinctions between OROA and the traditional ROA assets calculation. When it comes to income, OROA uses EBIT or Operating Income, but ROA uses net income as the numerator. With assets considered, OROA uses assets used for regular business operations, while ROA accounts for total assets in the calculation.
Interpreting Operating Return on Assets
One important way to use the result includes looking at a company’s OROA on a trended basis to determine if a business is declining, stagnating, or increasing its profitability.
Especially for investors, it’s important to contrast the OROA of the company at hand against rival businesses within the company’s same industry. When it comes to comparisons, the higher the OROA is, the better the result.
Another important consideration for investors is that OROA provides an accurate assessment of a business’ core operations. Since assets analyzed are for a business’ core profits or services, if a business reports profits from selling a division or it reports a one-time profit surge from investments, its core profitability is less likely to be skewed during investment analysis.
When used in conjunction with other accounting and financial metrics, businesses can continually measure and adjust their operations to increase efficiencies to increase their return on operating assets.
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